Allot Ltd.

Welcome to Allot's conference call to discuss its financial results for the quarter. I would like to thank Allot's management for hosting this conference call. All participants are present in this and in remote. Following the formal presentation, instructions will be given for the question and answer session. As a reminder, this conference call is being recorded. If you have not received the company's press release, please check the company's website at www.allot.com. With me today on the line are Mr. Eyal Harari, CEO, and Mr. Yat Nahum, CFO. Following Eyal's prepared remarks, we will open the call for the question and answer session. Both Eyal and Mia will be available to answer those questions. You can also find the highlights of the quarter, including the financial highlights and metrics, including those we typically discuss in the conference call, in today's earnings press release. Before we start, I'd like to point out the following State Harbour Statement. This conference call may contain projections or other forward-looking statements regarding future events or the future performance of the company. Those statements are early predictions and Allot cannot guarantee that they will in fact occur. Allot does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including as a result of changing market trends, delays in the launch of services by Allot customers, reduced demand and the competitive nature of the security services industry, as well as other risks identified from the documents filed by the company itself. securities and exchange commissions. Also, the financial results in this call will be presented mainly on a non-GAAP basis. Allot believes that these non-GAAP financial measures provide more consistent and comparable measures to help investors understand Allot's operating performance in the quarter. For all the data, please refer to the financial tables published in the results press release issued earlier today, which also include the GAAP to non-GAAP reconciliation tables. And with that, I'd now like to hand the call over to Eyal Harari, CEO of Allot. Eyal, please go ahead.

Thank you, Kenny. We are pleased to report a very strong start to 2026. Our first quarter revenues were up 14% year-over-year, representing a meaningful acceleration over last year, and marking our third consecutive quarter of double-digit year-over-year growth. Our results reflect the continued successful execution of our cybersecurity first strategy. with CCAS ARR growing nearly 60% year-over-year in the quarter. CCAS revenue rose to approximately one-third of the total revenues in the quarter, up from approximately a fifth a year ago. CCAS growth is driving the continuous scaling up of our recurring revenue base, which now represents 67% of total revenue, and provide us with strong visibility into the quarters ahead. We clearly have transformed a lot into a profitable growth company. These solid results combined with the strong visibility gives us increased confidence that we are well positioned to continue our revenue growth trajectory at a mid-teens rate over the coming year. In terms of profitability, we are benefiting from the significant operating leverage inheriting Allot's business model. Improving gross margin along with significant operating leverage led to substantial improvement in profitability. This operating leverage and enhanced profitability contributed to Allot generating its strongest ever quarterly operating cash flow. Other contributors of this strong cash flow generation of over 10 million in the quarter include the large multi-million dollar smart project we have won in the recent quarters as we began to execute on the backlog and the increased contribution from our success business. This strong cash flow enabled us to end the quarter with almost 100 million in cash and no debt, further strengthening our increasingly healthy balance sheet. This gives us significant flexibility to continue investing in our long-term business growth. The Board regularly reviews its capital allocation strategy. Our three main considerations are investment in organic growth, pursuing strategic compelling acquisitions, and returning capital to shareholders. The goal of our capital allocation strategy is to maximize long-term shareholder value. We are very pleased with the continued growth in the Sikos business. Given the significant long-term potential we continue to see in this market, we have increased our investment in R&D, where we are innovating and bringing new products, services and capabilities to the market. We have also invested in increased sales and marketing efforts, where we are expanding our reach further into existing customers and reaching new potential customers. These investments are translating into the strongly growing pipeline we see today. The pipeline expands across all of our regions, and we are gaining more prospects all the time. At the same time, we are supporting our existing customers to successfully market more of the cyber security services we power, to strong end-user adoption while upselling new potential services which would be attractive to their user base. Our smart product line remains an important and highly complementary part of the unified Cybersecurity First platform. These products are built on decades of a lot innovation and deliver best-in-class network intelligence. We are executing well On the multi-million dollar projects we have won in the recent quarters, including the deployment and upgrades of our TerraSleep platform with Tier 1 operators. As a reminder, the TerraSleep platform is our highly strategic, next-generation, ultra-high-capacity multi-service gateway, offering deep visibility and control over network traffic, and providing a scalable foundation for our advanced cybersecurity and value-added services. During the quarter, we secured a significant Terra 3 win, a multi-million dollar upgrade deal with an existing Tier 1 customer. This win further underscores the strong customer interest and growing demand we are seeing for the Terra 3. Looking beyond this last win, our smart pipeline remains very healthy, with strong opportunities at multiple stages, both from existing customers planning their upgrades to Terra 3 and for new customer engagements that are advancing well through our sales process. Our multi-year smart projects continue to provide good revenue visibility into 2026, 2027 and beyond, and add an additional layer of long-term revenue stability. During March, we participated in Mobile World Congress in Barcelona, where we held a large number of meetings with both existing and potential customers and partners, and showcased our latest cybersecurity and network intelligence offering. The feedback was very positive. particularly around the converged cybersecurity and network intelligence positioning and our roadmap for AI-enabled security. At the end of March, we also attended the RSA conference in San Francisco, one of the leading global cybersecurity events. RSA was again a highly productive event for us with strong interest in our offering. Both events helped us further build our pipeline of opportunities for the rest of the year. It is clear that our broad suite of products and services driven by our cybersecurity strategy is increasingly resonate with the operators globally, leading to new revenue streams for new customers and from upselling and co-selling to existing customers. As I discussed last quarter, but I think it's important to stress again, the cyber threat landscape continues to evolve quickly, particularly with the PKI, which together are dramatically expanding the cybernet service for consumers, small businesses, and enterprises. A lot plays an important role in protecting businesses and consumers from ever-increasing cyber threats, and we strongly believe that today's environment has never been more conductive to our embedded network-native, always-on cybersecurity offerings. Allot solution offer a highly differentiated and convenient experience for end consumers who cannot easily protect themselves. Our SICAS platform delivers real-time zero-effort protection that scales seamlessly with the operator-subscriber base with no end-user configuration required. Exactly what is needed to defend against fast-moving AI-powered cyber threats. We continue to invest in expanding our platform with new capabilities, many of them significantly enhanced by AI, both to address current risks and to anticipate the next generation of threats. These investments reinforce our competitive position and support our long-term differentiation in the consumer and SMB segments, segments which are underserved by traditional security solutions. In summary, we are proud of our first quarter performance. Our success was driven by strong growth in our cybersecurity revenues, following strong uptake by end users adopting the telco-provided cybersecurity services that we power. This trend led directly to substantial improvement in revenue, margins, profitability, and cash flow generation for the third consecutive quarter. With 67% of total revenues recurring, we have strong visibility. We believe that we can maintain and build on our positive momentum in the quarters ahead. Looking ahead, we are reiterating our 2026 revenue guidance of between $113 million and $117 million with continued profitability improvements for the year. Following the strong first quarter, we feel increasingly confident toward the upper end of that range. And furthermore, we now have the strong visibility ahead to predict 40% or more CCAS revenue growth in 2026. And now, I would like to hand it over to our CFO, Liat Nahum, for the financial summary. Liat, please go ahead.

Thanks, Eyal. We reported revenue of $26.4 million in the quarter. Up 14% year-over-year. Revenue from our gross engine security as a service were 8.7 million in the quarter, up 71% year-over-year, comprising 33% of our total revenue. Our security as a service annual recurring revenue as of March 31, 2026, were 33.7 million, up 59% year-over-year. 67% of our overall revenue this quarter were recurring revenue. I will now discuss the non-GAAP financial measures. For all our financial results, including the GAAP financial measure and the other various breakdowns of our revenue, please refer to the table in our results press release. Our non-GAAP gross margin in the quarter was 71.3%. compared with the 70.4% in the first quarter of last year. The improvement reflects the high contribution of SICA to our overall revenue mix. As mentioned in previous quarters, our non-GAAP gross margin depends on the specific product mix sold in the quarter. Our expectation for gross margin in 2026 remains in the range of 70%, as it has been in previous years. As CICA's revenue continues growing as a percentage of overall revenue, we expect our gross margin to continue trending higher over time. Non-GAAP operating expenses for the quarter were $16.2 million, compared with the $15.9 million in the first quarter of last year. The slight increase in OPEX reflects our increased investment in sales and marketing to support our pipeline build. as well as investment in R&D to support our product development roadmap and innovation, in particular our cybersecurity offering, which we discussed last quarter. While we are making select investment in sales and marketing and R&D, we remain disciplined and working at a high operational efficiency. We reported a non-GAAP operating income of 2.6 million, with an operating margin of 9.9%, compared with the non-gas operating income of 0.4 million or an operating margin of 1.8% in the first quarter of last year. Allot had 499 full-time employees as of March 2026. In terms of non-gas net profit, we reported 3.1 million in the quarter or a profit of 6 cents per diluted share compared with a non-GAP net income of 0.8 million or a profit of 2 cents per diluted share in the first quarter of last year. We generated record operating cash flow in the first quarter of 10.6 million, reflecting robust profitability and strong cash collection. The strong operating cash flow was partially attributable to one-time advance payments after reaching milestones from a few of our major smart deals that we reported in recent quarters. This is also reflected in our increase in deferred revenue. This is a positive sign that we progress executing those projects, and related revenue will materialize this year. Allotted a robust balance sheet with no debt, cash, short and band deposits, restricted deposits, and investments, as of March 31st, 2026, totaled 98 million versus 88 million as of December 31st, 2025. Looking ahead to the rest of 2026, we are reaffirming our full year 2026 revenue guidelines of between 113 to 117 million. Following a strong first quarter, we feel increasingly confident toward the upper end of that range, and furthermore, we now have the strong visibility ahead to predict 40% or more CCAS revenue growth in 2026. Our gross margin expectation for the year remains in the range of 70%, with a specific gross margin in any given quarter depending on our product mix. On the operating expense side, we expect to increase our sales and marketing as we continue to build our pipeline for the next several years. We also expect modest increase in R&D expenses as we continue to invest in developing our products. Overall, we continue to expect profitability improvement for 2026 as the operating leverage inherent in a lot financial model shines through. That ends my summary. Eyal and I are now happy to take your questions.